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Real Estate Investing: What Does the Purchase of Chicago’s Willis Tower Mean?

As one of the tallest buildings in the world and the second tallest building in the Americas, Chicago’s Willis Tower (formerly known as the Sears Tower) is no stranger to the limelight. The 110-story building positioned in the heart of downtown has been a part of Chicago’s skyline for decades. Since its construction in 1973, it has remained one of Chicago’s most popular tourist destinations.

It’s back in the spotlight, as talks are underway with private equity real estate giant Blackstone Group to purchase the building at a valuation of $1.3 billion. The sale would be a record for an office tower outside of New York City.

"We are bullish on Chicago as companies expand within and move into the city and look for first-class office space," said Jacob Werner, a managing director in Blackstone's real estate group in a recent USA Today article. "Moreover, we see great potential in further improving both the buildings retail operations and the tourist experience for one of the most popular destinations for visitors to Chicago."

 

An Icon of the Chicago Landscape

With approximately 4.56 million gross square feet, equivalent to 105 acres or 16 city blocks in Chicago, the Willis Tower provides unobstructed views of the city through windows and glass floors with the addition of The Skydeck Ledge--1,353 floors straight down! The addition of "The Ledge" in 2009 brought in record-breaking visitor counts since its debut.

Weighing over 222,500 tons and costing over $175 million to build, the Willis Tower uses only the finest materials to highlight the property’s prestige and grand features. Boasting 25 miles of plumbing, 1,500 miles of electric wiring, 80 miles of elevator cable, and 145,000 light fixtures, this magnificent steel frame is truly a sight!

Related Article: 5 Features of High-Quality Architecture

real estate investingKnown previously as the Sears Tower, the Willis Tower held many great tenants such as Sears, Keck, Mahin & Cate, and in August 2012, United Airlines announced their move of its corporate headquarters to Willis Tower.

In 1997, Toronto-based TrizecHahn Corporation, also the owner of the CN Tower at the time, purchased the Sears Tower for $110 million and assumed approximately $4 million in liabilities along with a $734 million mortgage. Unable to continue, TrizecHahn Corporation surrendered the building to the holder of the note, MetLife.

Shortly thereafter, in 2004, MetLife sold the building for a whopping $840 million, a record price at that time. In March of 2009, Willis Group Holdings, a London-based insurance broker, agreed to lease a portion of the building and also obtained the naming rights. On July 16, 2009, Sears Tower was officially named Willis Tower. This structure has continued to be the pride and joy of Chicago!

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A Budding Economy

It comes as no surprise that investors would be interested in the Willis Tower, as Chicago’s economy has seen improvement in the office sector for some time now. In fact, the city of  is coming off the strongest year of office building sales downtown in seven years. Boosted by low interest rates and a strong appetite for U.S. real estate investments from both domestic and international investors, Chicago has experienced some of its biggest office deals in the 2014 year:

  • Newport Beach, Calif.-based Irvine Co. paid $850 million for the 60-story tower at 300 N. LaSalle St. in River North, a record for total price and per square foot, at $652.
  • Chicago-based Heitman paid $715 million for the 46-story tower at 353 N. Clark St., also in River North. That deal was for $604 per square foot, No. 2 all-time in Chicago.
  • Looking to capitalize, the Aon Center's owner recently said it would put the 80-story tower up for sale. Real estate experts estimate the 2.7 million-square-foot building at 200 E. Randolph St., third-tallest in Chicago, could sell for about $650 million.

Though the official change of hands has not yet taken place in the Willis Tower deal, Blackstone executives divulged to The Wall Street Journal that the company plans to invest as much as $150 million into the tower. These plans include an upgrade to the Tower’s observation deck to generate more profit due to the growing popularity of observation decks.

Based on this transaction price, the tower will sell for approximately $342 per square foot. According to Ken Riggs, President of Situs RERC, “From a risk-adjusted return basis, it’s very attractive, especially with what’s going on in other marketplaces”. Riggs also believes that while the Willis Tower is an old building, it remains an iconic one. To add to that, Riggs points out that the location of the tower, in the West Loop market, has a very strong long-term potential.

real estate investing Willis Tower Skydeck - "The Ledge"

Prior to the news of the Blackstone deal, there was quite a bit of speculation as to what was happening with the tower. But because of its huge size and unusually broad sources of revenue, experts say Willis Tower's value is more difficult to pinpoint than a traditional office property. One estimate indicated that the 2015 net operating income of the tower could reach $88.6 million - $48.7 million for office, retail and restaurant space, and $28.8 million from the 103rd floor Skydeck (home to the Ledge tourist attraction), and $11.1 million from broadcast space and antennas atop the building.

Stories were also buzzing about the development potential available on the land positioned to the southwest side of the property, as well as the ability to increase current leases. According to recent reports, the tower is approximately 84% leased, with an average remaining lease term of 9.5 years. Furthermore, the largest tenants are United Airlines and the law firms of Schiff Hardin and Seyfarth Shaw.

“This is simply a unique asset in real estate in the United States and has been an excellent investment for us,” a representative of Willis Tower's ownership group said in the Blackstone statement. “We are very happy that Blackstone is buying it and know that they will continue to be an excellent steward of this world-famous building."

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Real Estate Investing Online

Large commercial transactions such as the Willis Tower bring the Chicago real estate market into the national spotlight, but there are still plenty of incredible deals available to national real estate investors looking to participate in this growing market.  Online real estate investing with Patch of Land is a great way to diversify your portfolio with short-term investment opportunities in the Chicago housing market and beyond. We invite you to browse our website and welcome the opportunity to help you with your next investment.

Now tell us what you think - Was the Willis Tower's price too high?  Do you think they will change the name of the building again? Should they have changed the name at all? Leave your comments below!



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